Bullish Traders Are Turning To Rare Earth Metals (MCP, AVL)

This past week many momentum traders have turned their attention to a niche corner of the commodity markets – rare earth metals. Companies that explore and or process rare metals are of specific interest to traders because of strong moves in a couple of the sector’s key players. Based on their respective chart patterns, active traders will likely add these stocks to their watch lists because they could be setting up for a continued move higher. (For more, see: Understanding Rare Earth Metals.)

Rare Earth Metals on the Move

Molycorp, Inc. (MCP) is one of the most popular rare earth players available in the public markets and it is a favorite amongst many who are interested in the sector. Recently, the company announced that it will supply rare earth metals for use in Siemens AG’s (SIEGY) wind turbine generators over the next 10 years. This news could be enough of a catalyst to continue to send prices higher over the coming weeks and months. Taking a look at the chart below, you can see that the stock is trading within a defined double bottom pattern. As irrational as it may seem, from a momentum trader’s perspective, despite a 70.75% move over the past week, the chart is suggesting that a break even higher is very possible. (For more, see: A Rare Opportunity In Rare Earth Metals.)

Avalon Rare Metals

Another rare earth metals company that has caught the attention of momentum traders is Avalon Rare Metals, Inc. (AVL). Most active traders view this stock as risky given its relatively small market capitalization. When trading stocks in volatile sectors such as basic materials and specifically rare earth metals, it is important to have a strong risk management strategy. Taking a look at the chart, you can see that the price has moved nearly 60% so far this year and that the price is trading with a triangle pattern. The converging trendlines suggest that a breakout is likely in the coming weeks, and the recent crossover between the MACD and its signal line suggests that the direction will be upward. (For more, see: A Primer On The MACD)

Diversify Your Rare Earth Holdings

Active traders who are not comfortable with investing in specific small-cap rare earth may want to investigate the Market Vectors Rare Earth/Strategic Metals ETF (REMX). This ETF offers traders exposure to a basket of 21 holdings that conduct business in areas related to the mining, refining and manufacturing of rare earth/strategic metals. Taking a look at the chart, you can see that the ETF has been trending higher for most of 2015 and the recent move above the resistance level suggests that a reversal in the long-term downtrend is underway. The dotted ascending trendline will likely provide downside support for traders looking for a strategic level to place their stop-loss orders. (For more, see: Emerging Plays On Rare Earth Metals.)

The Bottom Line

The rare earth metals sector is often neglected by active traders because the companies in it tend to be small caps and relatively less liquid than other areas of the commodities market. Despite strong moves so far in 2015, and in some cases over the past week or so, strong chart pattern setups are suggesting that this group of companies could be ready for an even further move higher. Traders who want to reduce company-specific risk may want to check out the Market Vectors Rare Earth/Strategic Metals Fund because the current price level is offering an interesting risk/reward setup. (For more, see: Rare Earth Metals: Shrinking Supplies Amid High Demand.)

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